Coal India’s victory of reducing its penalty to near zero seem to be short-lived. As had been expected by the market, power producers, including public sector giant NTPC have refused to sign the new fuel supply agreement with Coal India. This news is expected to affect power sector companies more than it will affect Coal India.

The reason power companies are refusing to sign the agreement is because they feel it is biased and absolves Coal India from all obligations. NTPC chairman and managing director Arup Roy Choudhury has been quoted by The Economic Timessaying “We will not sign the new fuel supply agreement in the present form because it does not provide much in terms of coal supply commitment.”

After refusing to agree to sit on the negotiation table, Coal India was issued a Presidential directive to issue Fuel Supply Agreements with power companies. Coal India managed to bargain a low penalty clause, thanks largely to the stand taken by independent directors and shareholder activism led by The Children Investment Fund.

According to the new pact, Coal India will be liable to pay a penalty of 0.01%, that too after three years if it fails to supply the fuel. The contract also gives discretion to the supplier to terminate an agreement unilaterally. This clause itself is enough to scare away the power producers as it creates uncertainty over the tenure of the agreement.

Earlier Coal India had said that, if they had to import coal to feed the power producers it will be passing on the differential between the price at which they sell in the domestic markets and international market to the power producers.

According to a report in the Financial Express, Association of Power Producers has said that the increase in price of coal due to imports would need to spread over the entire quantity of domestic production to keep power cost manageable. In other words, power companies are not willing to buy coal at imported price, but need it subsidised by passing on the higher price to all domestic consumers.

It is this subsidised price which seems to be stalling the entire process, as agreement for coal at international prices could have been signed by the association of power producers themselves. Commenting on NTPC’s refusal to sign the fuel supply agreement DNA quotes the newly appointed chairman of Coal India as saying that “The main issue is they are not agreeing to accept the gross calorific value (GCV) formula and want to go back to old useful heat value (UHV)”

Price thus seems to be the main issue, penalty clauses are just a negotiation tool being by the power producers.